††††† NECESSITY, FUNCTION, AND
CONFORMITY: EO 2009-535, signed June 12, 2009, created the Department of
Insurance, headed by the Commissioner of Insurance. KRS 304.2-110 provides that
the Executive Director of Insurance may make reasonable administrative
regulations necessary for or as an aid to the effectuation of any provision of
the Kentucky Insurance Code, as defined in KRS 304.1-010. This administrative
regulation establishes standards which the Commissioner of the Department of
Insurance may use for identifying insurers found to be in a condition to render
the continuance of their business hazardous to policyholders, creditors, or the
public.

††††† (2) "Insurer"
means any of the entities listed in KRS 304.33-020 and an industrial insured
captive insurer as defined in KRS 304.49-010(8).

††††† Section 2. Standards. One
(1) or more of the following standards may be considered by the commissioner to
determine whether the continued operation of any insurer transacting an insurance
business in Kentucky may be hazardous to its policyholders, creditors, or to
the general public:

††††† (2) The National
Association of Insurance Commissioners Insurance Regulatory Information System
and its other financial analysis solvency tools and reports;

††††† (3) Whether the insurer has
made adequate provision, according to presently accepted actuarial standards of
practice, for the anticipated cash flows required by the contractual
obligations and related expenses of the insurer, considered in light of the assets
held by the insurer with respect to the reserves and related actuarial items
including the investment earnings on the assets and the considerations
anticipated to be received and retained under the policies and contracts;

††††† (4) The ability of an
assuming reinsurer to perform and whether the insurer's reinsurance program
provides sufficient protection for the insurer's remaining surplus after taking
into account the insurer's cash flow and the classes of business written as
well as the financial condition of the assuming reinsurer;

††††† (5) Whether the insurer's
operating loss in the last twelve (12) month period or any shorter period of
time, such as net capital gain or loss, change in nonadmitted assets, or cash
dividends paid to shareholders, is greater than fifty (50) percent of the insurer's
remaining surplus as regards policyholders in excess of the minimum required;

††††† (6) Whether the insurerís
operating loss in the last twelve (12) month period or any shorter period of
time, excluding net capital gains, is greater than twenty (20) percent †of the
insurerís remaining surplus as regards policyholders in excess of the minimum required;

††††† (7) Whether a reinsurer,
obligor or any entity within the insurerís insurance holding company system is
insolvent, threatened with insolvency, or delinquent in payment of its monetary
or other obligations, and which may affect the solvency of the insurer;

††††† (8) Any contingent
liabilities, pledges, or guaranties which either individually or collectively
involve a total amount which may affect the solvency of the insurer;

††††† (9) Whether any controlling
person of an insurer is delinquent in transmission or payment of net premiums
to the insurer;

††††† (10) The age and
collectability of receivables;

††††† (11) Whether the management
of an insurer, including officers, directors, or any other person who directly
or indirectly controls the operation of the insurer, fails to possess and
demonstrate the competence, fitness, and reputation necessary to serve the insurer
in that position;

††††† (12) Whether management of
an insurer has failed to respond to inquiries relative to the condition of the
insurer or has furnished false or misleading information concerning an inquiry;

††††† (13) Whether the insurer
has failed to meet financial and holding company filing requirements as set
forth in KRS 304 Subtitle 3 and 304 Subtitle 37;

††††† (14) Whether management of
an insurer either has filed any false or misleading sworn financial statement,
has released a false or misleading financial statement to lending institutions
or to the general public, has made a false or misleading entry, or has omitted
an entry of material amount in the books of the insurer;

††††† (15) Whether the insurer
has grown so rapidly and to such an extent that it lacks adequate financial and
administrative capacity to meet its obligations in a timely manner;

††††† (16) Whether the insurer
has experienced or will experience in the foreseeable future cash flow or
liquidity problems;

††††† (17) Whether management has
established reserves that do not comply with minimum standards established in
KRS 304 Subtitle 6 and KRS 304.3-242;

††††† (18) Whether management
persistently engages in material under reserving that results in adverse
development; and

††††† (19) Whether transactions
among affiliates, subsidiaries or controlling persons for which the insurer
receives assets or capital gains, or both, do not provide sufficient value,
liquidity or diversity to assure the insurerís ability to meet its outstanding
obligations as they mature.

††††† Section 3. Corrective
Action. (1) For the purposes of making a determination of an insurer's
financial condition under this administrative regulation, the commissioner may:

††††† (a) Disregard any credit or
amount receivable resulting from transactions with a reinsurer which is
insolvent, impaired, or otherwise subject to a delinquency proceeding;

††††† (b) Make appropriate
adjustments including disallowance to asset values attributable to investments
in or transactions with parents, subsidiaries, or affiliates consistent with
KRS 304 Subtitles 6 and 7;

††††† (c) Refuse to recognize the
stated value of accounts receivable if the ability to collect receivables is
highly speculative in view of the age of the account or the financial condition
of the debtor; or

††††† (d) Increase the insurer's
liability in an amount equal to any contingent liability, pledge, or guarantee
not otherwise included if there is a substantial risk that the insurer will be
called upon to meet the obligation undertaken with the next twelve (12) month
period.

††††† (2) If the commissioner
determines that the continued operation of the insurer in Kentucky may be hazardous
to its policyholders, creditors, or to the general public, the commissioner
may, upon his determination, issue an order requiring the insurer to:

††††† (a) Reduce the total amount
of present and potential liability for policy benefits by reinsurance;

††††† (b) Reduce, suspend, or
limit the volume of business being accepted or renewed;

††††† (h) Document the adequacy
of premium rates in relation to the risks insured;

††††† (i) File, in addition to
regular annual statements, interim financial reports in the form of and
pursuant to the instructions for the quarterly statements prescribed by the
National Association of Insurance Commissioners in accordance with KRS
304.3-240 and 304.3-241;

††††† (j) Correct corporate
governance practice deficiencies, as identified by the Financial Standards and
Examination Division staff through the analysis or examination process;

††††† (k) Provide a business plan
to the commissioner in order to continue to transact business in the state; or

††††† (l) Adjust rates for any
non-life insurance product written by the insurer to improve the financial
condition of the insurer.